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A weak economy, new tax breaks, and aggressive tax sheltering have pushed
corporate income tax receipts down to historically low levels, both relative
to the size of the economy and as a share of total federal revenues.
According to the most recent budget projections of the Congressional Budget
Office, corporate revenues will remain at historically low levels even after
the economy recovers, and even if the large new corporate tax breaks enacted
in 2002 and 2003 are allowed to expire on schedule.

Deficits over the next decade are now projected to be enormous in size. A
joint analysis by the Center on Budget and Policy Priorities, the Concord
Coalition, and the Committee for Economic Development projects deficits
totaling $5 trillion through 2013. An analysis by Brookings economists
reaches a very similar conclusion, while Goldman Sachs projects deficits
totaling $5.5 trillion.[1]
Despite the deteriorating fiscal outlook and the historically low corporate
revenue collections we already face, Congress nonetheless seems poised to
shower more tax breaks on corporations that would cause deficits to grow
substantially larger over time (see box).

Treasury Department figures show that actual corporate income tax
revenues fell to $132 billion in 2003, down 36 percent from $207 billion in
2000.

As a result of these low levels, corporate revenues in 2003 represented
only 1.2 percent of the Gross Domestic Product (the basic measure of the size
of the economy), the lowest level since 1983, the year in which corporate
receipts plummeted to levels last seen in the 1930s.

Corporate revenues represented only 7.4 percent of all federal tax
receipts in 2003. With the exception of 1983, this represents the lowest level
on record (these data go back to 1934).

Pressure to cut taxes for corporations is likely to intensify this fall as
Congress takes action to comply with a recent ruling by the World Trade
Organization that tax subsidies provided to
U.S.
exporters violate trade agreements. The WTO authorized European countries
to impose sanctions of $4 billion a year on
U.S.
exports if these subsidies are not eliminated.

Repealing these export subsidies would raise about $50 billion in revenues
over ten years, which creates an opportunity for supporters of corporate
tax cuts to push for at least that much in new corporate tax breaks.
Indeed, both the measure that the Senate Finance Committee adopted on
October 1 (S. 1637) and the measure introduced by House Ways and Means
Chairman Bill Thomas (H.R. 2896) would provide significantly
more than $50 billion in new tax cuts to corporations.

The Thomas bill
would provide corporate tax breaks totaling $200 billion over ten years
while offering revenue-raising offsets of only $72 billion. As a
result, the package would cost $128 billion over the decade.
Moreover, the measure includes a number of tax cuts that artificially
expire before the end of the ten-year period; as a result, the true cost
of the bill, assuming extension of these tax breaks (many of which, such
as the popular research and experimentation tax credit, are sure to be
extended) is substantially higher than the reported $128 billion.

The package
adopted by the Senate Finance Committee on October 1 is ostensibly
deficit-neutral, with revenue-raising provisions in the bill that appear
to equal the cost of the bill’s new corporate tax breaks over the
2004-2013 period. But the bill’s appearance of revenue neutrality
rests upon gimmicks. Several of its new tax cuts do not become fully
effective until late in the decade, which makes their cost in the ten-year
budget window much smaller than the cost of continuing these tax cuts
indefinitely. The result is a serious mismatch over time between the
revenue raised by the “offsets” in the bill and the revenue lost by the
tax cuts. This can be seen in Joint Tax Committee figures showing
that the measure would lose more than $9 billion in the second half of the
ten-year period and lose more than $4 billion in 2013 alone. Over
the long run, the bill is not deficit neutral and would produce sizeable
revenue losses, thereby enlarging long-term deficits that already are
frightening in size.

Concerns about
the corporate tax-cut measures under consideration in both the House and
Senate extend beyond their high cost. Although a detailed analysis of
these measures is beyond the scope of this paper, both bills would further
erode the corporate income tax base and potentially distort the allocation
of economic resources. In an attempt to satisfy competing business
interests, these bills offer dozens of targeted tax breaks for
U.S.
manufacturers and
U.S.
multinational corporations; tax breaks targeted in this manner can create
economic inefficiencies by favoring certain activities over others that
may be economically superior but less profitable once the tax break is
factored in. Both measures also provide a temporary tax reduction for the
repatriation of overseas profits. This type of tax amnesty rewards firms
that have sheltered funds overseas and potentially encourages more
sheltering, as multinationals assume that the tax amnesty will be repeated
in the future. Further, provisions in the Thomas bill would weaken
current anti-abuse rules, creating new opportunities for
U.S.
multinationals to shelter profits overseas.

Corporate income tax revenues are sensitive to economic
conditions, and the recent slowdown in the economy has played a significant
role in the collapse of corporate revenues. But the economy explains only
part of the decline. Tax cuts for
corporations enacted over the past few years have also contributed
significantly. Based on Joint Committee on
Taxation estimates, provisions enacted in
2002 and 2003 reduced taxes for businesses by over $50 billion in 2003, and
corporations are by far the largest beneficiaries of these tax breaks.

Corporate revenues are further diminished by
aggressive tax avoidance strategies, including the sheltering of corporate
profits overseas. No precise estimates of the extent of these tax shelter
activities exist. In testimony before the Senate Finance Committee in March
2000, the Joint Committee on
Taxation stated that “the data are not
sufficiently refined to provide a reliable measure of corporate tax shelter
activity.” Using the evidence that is available, however, the Joint Committee
concluded that “there is a corporate tax shelter problem” and that “the
problem is becoming widespread and significant.”[2]
Similarly, former IRS Commissioner Charles Rossotti identified abusive
corporate tax shelters as "one of the most serious and current compliance
problem areas."[3]
Internal IRS studies on tax sheltering, recently disclosed by the General
Accounting Office, indicate that “tens of billions of dollars of taxes are
being improperly avoided and the potential for the proliferation of abusive
tax shelters is strong.”[4]

Long-term Decline in Corporate Revenues

Other recent analyses have examined the stunning deterioration in the budget
outlook, as well as the large, persistent deficits that now loom as far as the
eye can see and that will swell further as the baby boom generation retires.
In this analysis, we seek to provide context for the upcoming Congressional
debate on corporate tax cuts, by examining trends in corporate tax revenues over
recent decades. The analysis includes the following findings:

Although taxes paid by corporations, measured as a share of the
economy, rose modestly during the boom years of the 1990s, they remained
sharply lower even in the boom years than in previous decades. According to
OMB historical data, corporate taxes averaged 2 percent of GDP in the 1990s.
That represented only about two-fifths of their share of GDP in the
1950s, half of their share in the 1960s, and three-quarters of their share in
the 1970s.

The share that corporate tax revenues comprise of total federal tax
revenues also has collapsed, falling from an average of 28 percent of federal
revenues in the 1950s and 21 percent in the 1960s to an average of about 10
percent since the 1980s.

The effective corporate tax rate — that is, the percentage of corporate
profits that is paid in federal corporate income taxes — has followed a
similar pattern. During the 1990s, corporations as a group paid an average of
25.3 percent of their profits in federal corporate income taxes, according to
new Congressional Research Service estimates. By contrast, they paid more
than 49 percent in the 1950s, 38 percent in the 1960s, and 33 percent in the
1970s.

Corporate income tax revenues are lower in the
United States than in most
European countries. According to data from the Organization for Economic
Cooperation and Development, total federal and state corporate income tax
revenues in the United States in 2000, measured as a share of the economy,
were about one-quarter less than the average for other OECD member countries.
Thirty-five years ago, the opposite was true — corporations in the
United States bore a heavier
burden than their European counterparts.

Corporate Income Taxes

According to the Internal Revenue Service, more than 27 million businesses,
including farm businesses, filed tax returns in 2000. Of these businesses,
only 2.2 million — or about 8 percent — were subject to the corporate income
tax.

These corporations — known as “C” corporations —
include both large and small businesses. More than half of all C corporations
had assets of less than $100,000 in 2000. The 0.8 percent of corporations
that had assets of more than $100 million, however, accounted for more than 95
percent of all C corporation assets. In addition, fewer than one percent of
all C corporations accounted for more than 85 percent of all federal corporate
income taxes paid in 2000.[5]
(Note: The profits of businesses other than C corporations are
subject to the individual rather than the corporate income tax.)

Looking over the post-World War II period (starting in 1950), the corporate
income tax has been an important — but shrinking — source of federal revenue
(see Figure 1).[6]
It was the second largest source of revenue, behind the individual income tax,
until 1968, when payroll taxes grew to be a larger share. In fact, there
has been a virtually complete role-reversal between payroll taxes and corporate
income taxes in terms of their contribution to federal receipts. Corporate
income taxes reached a peak of 32 percent of federal tax receipts in 1952.
In 2003, they equaled just over 7 percent of federal revenues. This
decline was fairly steady, with corporate tax receipts equaling an average 21
percent of federal revenues in the 1960s, 15 percent in the 1970s, and less than
10 percent in the 1980s. After a brief rebound in the 1990s, when their
share rose to nearly 12 percent in the middle of the decade, corporate receipts
have now fallen to a percentage of federal tax collections not seen since the
early 1980s. In contrast, payroll taxes represented about 10 percent of
all federal tax receipts in 1952, but 40 percent in 2003.

Corporate income tax revenues have declined not only in terms of the share of
federal taxes that they comprise, but also when they are measured as a share of
the economy (see Figure 2). Corporate revenues averaged nearly 5 percent
of GDP in the 1950s and 4 percent in the 1960s, but then fell sharply to nearly
1 percent of GDP in 1983, reflecting the combination of tax cuts and economic
conditions. After rising slightly above 2 percent of GDP during part of
the 1990s, corporate receipts fell again after 2000, when the economy slowed.
In 2003, actual corporate revenues dropped to 1.2 percent of GDP, the lowest
level since 1937, except for 1983.[7]

As the economy recovers, CBO projects that
corporate receipts will rise, but that they will still remain just under 2
percent of GDP by the end of the decade (i.e., 2009). But this estimate
assumes that all of the recently enacted corporate tax breaks will expire by the
end of 2004, as currently scheduled. If these tax breaks are extended — a
distinct possibility given the intense pressure that exists to extend them and
the fact that those who oppose extension are likely to be accused of seeking to
raise taxes and of favoring a course that would injure the economy — corporate
revenues would represent only 1.5 percent of GDP and 8.5 percent of all federal
revenues during the second half of the decade, barely above today’s levels that
have been depressed by the weak economy.

Table 1 on the following page shows corporate
receipts both as a share of total federal receipts and as a share of the economy
for the decades since 1950. The trend of shrinking corporate tax revenues
is apparent in these data. Corporate income tax receipts recovered
somewhat in the 1990s relative to the 1980s, when corporate receipts hit
historic lows, but even in the 1990s, they remained far below the levels of
previous decades. Now they have declined further. As noted,
corporate revenues are expected to remain low over the coming decades, even
after the economy has fully recovered.

Corporate Income
Tax
Receipts as a Percentage of Total Federal Receipts and GDP, by Decade

Average
Percentage of

Corporate
Taxes
As:

Share of
Total Federal Receipts

Share of GDP

1950-59

27.5%

4.8%

1960-69

21.3%

3.8%

1970-79

15.0%

2.7%

1980-89

9.3%

1.7%

1990-99

10.5%

2.0%

2000-09*

9.6%

1.7%

*Reflects OMB
historical data through 2002, Treasury estimates of actual 2003, and
CBO projections (August 2003) for the remaining years. The CBO
projections assume that existing tax breaks will expire as scheduled
and will not be extended.

Some argue that the weakness in corporate income tax revenues is, in part, a
reflection of the decline in the number of C corporations, which peaked at 2.6
million in 1986. Offsetting this decline has been the rapid growth in
another type of corporation, known as S corporations. S corporations do
not pay corporate income tax, but rather pass through profits to their
shareholders, who in turn include this business income on their individual
income tax returns. As a result of liberalizations to the S corporation
rules since 1986, some C corporations have converted to S corporations as a way
to reduce their tax liabilities. But the precise impact of this shift on
corporate revenues is unclear, as typically only smaller C corporations are in a
position to change status. Limits on the number of S corporation
shareholders, for instance, make it impossible for the large, publicly-traded C
corporations to convert. As a result, the average C corporation in 2000
had assets that were 33 times larger than the assets held by the average S
corporation. While the S corporation liberalization may have eroded the
corporate income tax base when it comes to smaller corporations, it has not
significantly affected the large corporations that account for the lion’s share
of corporate income tax revenues.

Corporate Tax Rates

The corporate income tax rate is typically thought to be 35
percent. The reality is more complicated. The 35 percent rate is the highest
statutory corporate rate; lower levels of corporate income are taxed at lower
rates. The first $50,000 of taxable corporate income faces a 15 percent tax
rate, and the next $25,000 is subject to a 25 percent rate. From $75,000 to
$10 million of taxable profits, corporations pay a 34 percent rate. For
taxable income above $10 million, the rate is 35 percent. These lower
graduated rates phase out for corporations with larger incomes.[8]

In general, however, the share of corporate profits that is
ultimately taxed is much lower than the maximum statutory rate of 35
percent. According to a new Congressional Research Service report, since
1993 (when the top statutory rate was set at 35 percent), the effective
corporate tax rate — that is, the share of total corporate profits that is
paid to the federal government in corporate income taxes — has averaged
26.3 percent for non-financial corporations, or about one-quarter lower
than the 35 percent statutory rate.[9]
CRS notes that the effective tax rate is “a better measure of the true burden
of the [corporate income] tax.”

The effective rate is lower than the statutory rate not only because of the
existence of a graduated corporate rate structure, but also because corporations
receive a number of deductions, credits, and other benefits that reduce the
income taxes they owe. For instance, the Joint Committee on Taxation
estimates that in 2003, corporations will reduce their tax liabilities by $41
billion as a result of provisions that allow firms to write-off or depreciate
the cost of
equipment and buildings.[10]
Moreover, these estimates likely understate the tax savings corporations will
reap from these write-offs. Although the JCT estimates, which were released
in December 2002, take into account an expansion of the depreciation tax break
that was enacted in 2002, they do not reflect the significant additional
expansion of this tax break that was enacted in May 2003, in hopes of
encouraging more corporate investment amidst the economic slowdown.[11]

Recently Enacted Business Tax Cuts

The tax
cuts enacted since President Bush took office are typically described as
benefiting individuals and not businesses. Businesses are often
depicted as sitting on the sidelines, waiting patiently for their turn to
have their taxes reduced. The last two tax-cut measures, however,
included substantial tax cuts for businesses, including very generous
write-offs for investments in plants and purchases of equipment.
Under the package enacted in May 2003, businesses can immediately write
off 50 percent of the cost of these new investments; businesses with
smaller levels of new investments and purchases can immediately write off
the full cost of new investments and purchases up to $100,000. These
measures will provide businesses with tax breaks totaling more than $175
billion through 2005. Corporations, as distinguished from small
businesses, are by far the largest beneficiaries of these tax breaks.

Moreover, there is likely to be pressure to extend these provisions, which
are officially slated to expire after the next few years, and ultimately
to make them permanent. If extended throughout the decade, these business
tax breaks would reduce federal revenues by extremely large amounts — by
another $466 billion through 2013, according to the Joint Committee
on Taxation.

Beyond the tax
breaks that directly reduce corporate income taxes, the May 2003 tax-cut
package also included provisions that reduced the tax rate on corporate
dividends and capital gains (at least half of which are paid on company
stock). These provisions, which are slated to expire artificially
after 2008, would cost $307 billion over ten years if they were made
permanent. They were enacted with the goal of reducing the “double
taxation” of corporate income, which occurs when corporate earnings are
taxed first at the corporate level and then again at the individual level
when the shareholder receives a dividend payment or sells stock for a
gain. By reducing the overall tax on corporate income, these
provisions are also a benefit to corporations and the owners of capital.

The Joint Committee also estimates that the amount
of corporate income tax revenue being foregone in 2003 as a result of various
other major corporate tax breaks is as follows:

$9 billion from tax breaks to promote research and experimentation; and

$5 billion from subsidizing
U.S. exports (this is the subsidy
likely to be repealed in response to the WTO ruling that it violates trade
agreements).

The revenue losses from these tax breaks add up.
Just the four tax breaks listed here — not an exhaustive list — total more
than $60 billion in lost revenue in 2003. This figure is not exact since
there are some interaction effects between the tax breaks. Nevertheless, it
gives a sense of the magnitude of these provisions.

Figure 3 shows much the same declining trend in the federal effective
corporate tax rate over the post-World War II period as has occurred with regard
to corporate revenues both as a share of total federal revenues and as a share
of GDP. The Congressional Research Service data on the federal effective
corporate tax rate cover the period from 1959 to 2002; we have applied the CRS
methodology to years from 1950 to 1959, so that the data on effective tax rates
cover the same time period as other data presented in this analysis.

Part of the reason for the decline in the effective corporate tax
rate has been the decline in the corporate tax rate set in statute. The
statutory corporate income tax rate exceeded 50 percent for much of the 1950s
and 1960s, and was set at 48 percent for most of the 1970s and 46 percent for
the 1980s up until enactment of the Tax Reform Act of 1986. But the
effective corporate tax rate declined faster than the statutory rate for
most of this period, indicating that the tax breaks available to corporations
were expanding.

In particular, depreciation write-offs for investments were made
more generous in the mid-1950s and again in the 1960s, with the introduction
of the investment tax credit. The sharpest decline in the effective tax rate
relative to the statutory rate occurred in the early 1980s, with the enactment
of the “accelerated cost recovery system” — which, according to the late
Brookings Institution tax scholar Joseph Pechman, “broke the precedent with
prior laws by severing the connections between the useful life of an asset and
the period over which it was depreciated for tax purposes.”[12]

This trend was reversed with the 1986 Tax Reform Act. With the
enactment of the 1986 act, the corporate rate was lowered to 34 percent, but
at the same time tax breaks were eliminated; as a result, the effective
corporate tax rate increased in the years immediately following these changes,
closing some of the gap between the statutory rate and the effective rate.
With the creation of more corporate tax breaks in recent years, however, the
gap has widened again. (In addition, the rise in the number of S corporations, noted
earlier, has contributed to widening this gap; these firms do not pay
corporate income taxes but their earnings are included as part of total
corporate income.) This gap would likely be even larger if the figures were
able to take into full account the impact of tax sheltering by corporations,
as discussed below.[13]

Corporate Tax Shelters

In recent years, there has been considerable concern about the increasingly
aggressive use of tax shelters by corporations to avoid paying taxes. The
impact of these tax shelters — which, by definition, are designed to hide income
— are not captured in the Congressional Research Service data on effective tax
rates, because those data rely on corporate income that has been reported to the
IRS. If the income hidden through tax shelters could be estimated and a
more accurate estimate of total corporate income derived as a result, the
effective corporate tax rate would be shown to be lower — possibly substantially
lower — than is depicted here.

For instance, a study by the Institute on
Taxation and Economic Policy used the annual
reports of 250 major corporations between 1996 and 1998 to examine both these
corporations’ incomes and their tax payments. These annual reports typically
include the income that companies shelter from the tax authorities but include
in their reports to shareholders. The study found that of these 250 large
corporations — which together pay about 30 percent of all corporate income tax
in the United States — one in six paid no corporate income tax whatsoever in
at least one of these years. The effective tax rate of these corporations
declined over the three-year period from 22.9 percent to 20.1 percent.[14]
(The CRS figures, in contrast, show the effective rate as being essentially
flat or rising slightly over these years. The CRS figures do not reflect the
effects of increased tax sheltering.)

Further, the study by the Institute on
Taxation and Economic Policy points out that
these effective tax rates are well below the 26.5 percent rate that a
comparable survey estimated for a similar group of corporations in 1988, at a
time when effective rates were higher because the 1986
Tax Reform Act had closed corporate loopholes
and those loopholes had not yet been reopened or replaced with new corporate
tax breaks. One of the study’s authors, Robert McIntyre, director of Citizens
for
Tax Justice, recently testified before the
House
Budget Committee that corporate taxes as a
percent of corporate profits could decline to less than 15 percent this year.[15]

No precise estimate exists of the amount of income that
corporations shelter from income tax. As noted, the Joint Committee on
Taxation believes that the amount of
corporate tax shelter activity cannot be measured with existing data. It
finds that “much of the evidence in this area is anecdotal, but the importance
of this anecdotal evidence should not be discounted.” Rather than using
macroeconomic data, the Joint Committee examined three tax shelters that have
been disallowed by the courts. It found that these three cases alone resulted
in revenue losses of $7.4 billion over several tax years and that “this amount
most likely represents a fraction of the corporate tax that the Federal
government is not collecting because of corporate tax shelters” because
corporations using shelters escape audit and shelters goes undetected.

More recently, in testimony before the Senate Finance Committee on
IRS efforts to curb abusive tax shelters, the General Accounting Office
confirmed that the IRS believes that tens of billions of dollars have been
lost to tax shelters.[16]
GAO cited a database maintained by the IRS that shows that through 2003 about
$85 billion in revenues have been lost as a result of known tax shelters (used
by businesses and wealthy individuals) that IRS has officially classified as
abusive or that have characteristics of abusive transactions. These revenue
losses date back to 1989, but the majority occurred in years after 1993.
Another analysis, which was conducted by a contractor at the request of the
IRS, concluded that the revenue losses from corporate tax shelters alone were
even higher, estimating an average annual loss of between $11.6 billion and
$15.1 billion for the period 1993 through 1999. The estimates also show that
the size of the abusive shelter problem grew in each year analyzed, with the
revenue loss reaching between $14.5 billion and $18.4 billion in 1999.
Although the GAO and IRS expressed some concerns about the methodology used in
the study, it is possible that the estimates understate the problem because
the analysis reflects only the tax losses associated with sheltering by large
corporations and because it relied on a conservative definition of abusive
shelter.

Beyond this evidence, another sign that corporate tax sheltering
is on the rise is the divergence between the “book” income that corporations
report to their shareholders and the income that these corporations report to
the IRS for tax purposes. A number of studies conducted in recent years have
identified very large gaps between “book” and “tax” income, including a 1999
Treasury Department analysis that concluded that tax shelter activity was one
of the factors causing this divergence.[17]

A more recent National Bureau of Economic Research
study reached similar conclusions. It found that this gap has grown and that
in 1998, some $154 billion — or more than half of the gap between “book” and
“tax” income for that year — could not be explained by the traditional
accounting differences. The author concluded that “the large unexplained gaps
between tax and book income that have arisen during the late 1990s are at
least partly associated with increased sheltering activity.”[18]

International Comparisons

While the data show a large reduction over time in the tax burdens
of
U.S. corporations, some argue that
the
U.S. tax system nonetheless
imposes a greater burden on
U.S. companies than foreign
governments place on their companies. According to this argument, the
U.S. tax system places American
companies at a disadvantage relative to foreign firms. Other analysts,
however, have found that
U.S. companies do not appear to
face higher taxes than their foreign competitors and, in some cases, enjoy a
lower tax burden.

Figure 4 presents data from the Organization of Economic
Cooperation and Development on corporate income tax revenues as a share of the
economies for 29 OECD countries in 2000. Based on these data, nearly
three-quarters of these OECD countries collect more in corporate revenues
relative to the size of their economies than the
United States; only seven
countries —
Iceland,
Germany,
Austria,
Hungary,
Turkey,
Poland, and
Denmark — collect less than the
United States. Further, while the
corporate tax burden has declined in the
United States over the past
several decades, it has increased somewhat in other OECD countries. According
to these OECD data, corporate income tax revenues as a share of the economy
were greater in the
United States than in other OECD
countries in 1965; by 2000, the situation was reversed, with the
United States having a lower
percentage than the average for other OECD countries (see Figure 5).

Some assert that
U.S. companies are placed at a
disadvantage, because the
United States taxes
U.S. corporations on the income
they earn both in this country and overseas, following the general approach of
a “worldwide” tax system. These critics argue that this worldwide approach
places
U.S. multinational corporations at
a disadvantage relative to multinationals based in countries that rely on a
“territorial” system. Under a territorial system, a corporation pays tax only
to the country in which the income is generated. It thus owes no tax to the
country in which its headquarters are based on the income that it earns
abroad.

The Joint Committee on Taxation has concluded,
however, that “no country uses a pure worldwide or territorial system, … [and
that] all systems share at least some features of worldwide and territorial
approaches.”[19]
The
United States, for instance, does
not levy taxes on active business income until the income has been repatriated
to the
United States, and it provides a
credit for foreign income taxes already paid on that income. In addition,
countries that officially rely on a territorial system — about half of the
OECD countries officially use a territorial system, and half use a worldwide
system — employ restrictions to prevent too much investment from flowing
abroad to low-tax countries. Indeed, based on an analysis by a Treasury
Department economist, a territorial system favored by some European countries
would likely result in the imposition of a higher tax burden on
U.S. multinational corporations
than the current
U.S. worldwide system.[20]

According to this analysis, assuming no change in corporate
business practices, switching from a worldwide to a territorial system would
increase the taxes that
U.S. multinational corporations
pay by nearly $10 billion a year. This would occur because these companies
currently defer taxation on a very large portion of their overseas earnings
and are able to use foreign tax credits to offset not only the
U.S. taxes they would otherwise
owe on foreign income but also the
U.S. taxes they would otherwise
owe on some
U.S.income. The
analysis also finds that even if somewhat less stringent rules for a
territorial system were put in place and firms were to change their behavior
to take into account the implementation of a territorial system, their tax
bills would still likely increase. In short, despite claims that “the grass
is greener on the other side of the fence” — claims that often are made to
argue for still more corporate tax cuts in the United States — it appears that
the current U.S. tax system as a whole does not place U.S. multinational
corporations at a disadvantage relative to the systems employed by some of our
European trading partners.

Conclusion

Recent Congressional Budget Office estimates show corporate income
tax revenues falling to historically low levels in 2003. Whether measured as
a share of the economy or in terms of their contribution to total federal
receipts, corporate revenues are now a mere fraction of the levels seen in the
1950s and 1960s. Further, CBO projects that corporate revenues will remain at
historically low levels throughout the decade, even after the economy has
fully recovered and even if the corporate tax cuts enacted in 2002 and 2003
expire as scheduled. Although difficult to measure, corporate tax shelters
are a significant problem, according to studies by the Treasury Department and
the Joint Committee on Taxation, and have contributed to this decline in
corporate revenues.

Despite these low levels of corporate income tax receipts
and recent projections showing massive deterioration in the long-term fiscal
outlook, Congress is scheduled to consider more corporate tax cuts this fall.
The corporate tax-cut bill recently adopted by the Senate Finance Committee
and the measure recently introduced by House Ways and Means Chairman Bill
Thomas would dig the long-term deficit hole even deeper, since the corporate
tax breaks contained in these measures would ultimately outstrip the bills’
revenue-raising offsets.

End Notes:

[1]
Center on Budget and Policy Priorities, Committee for Economic
Development, and
Concord Coalition, “Mid-term and
Long-term Deficit Projections,”
September, 29, 2003.
Goldman Sachs, “The Federal Deficit: A $5.5 Trillion Read Elephant,”
U.S. Daily Financial Market
Comment,
September 9, 2003. A
Brookings analysis by William Gale and Peter Orszag projects deficits of
$4.6 trillion not counting a prescription drug benefit. This is
equivalent to the CBPP-Concord-CED projection of a $5 trillion surplus
with a drug benefit.

[2]
Joint Committee on
Taxation, “Testimony of the Staff of the
Joint Committee on
Taxation Concerning Interest and
Penalties and Corporate
Tax Shelters Before the Senate Finance
Committee,” JCX-23-00,
March 7, 2000.

[3]
Charles Rossotti, “Report to the IRS Oversight Board Assessment of the IRS
and the Tax System,”September 2002.

[6]
Although the corporate income tax was established in 1913, the modern tax
system took shape during World War II, when the role of the individual
income tax was expanded.

[7]Corporate
revenues have also been affected by timing shifts that were included in
the tax-cut measures enacted since 2000. Receipts were higher in 2002 and
lower in 2003 as a result of these shifts. These timing shifts, however,
do not affect the underlying trends. Corporate receipts in 2002 and 2003,
absent these shifts, would still have been at their lowest levels in six
decades, except for 1983.

[8]
As a result of these phase outs, corporations with taxable income between
$335,000 and $10 million effectively face a flat 34 percent rate, and
those with income above $18.3 million are effectively subject to a flat 35
percent rate.

[11]
The 2002 measure permitted corporations to write-off 30 percent of the
cost of new investments through September 2003. In May 2003, the
amount of new investments that could be written-off was increased to 50
percent, and the provision was extended through the end of 2004.

[13]
For a discussion of the divergence between the statutory and effective tax
rates since 1980, see U.S. Treasury Department analyst James Mackie, “The
Puzzling Comeback of the Corporate Income Tax,” National Tax Association
92nd Annual Conference, 1999.

[14]
Robert S. McIntyre and T.D. Coo Nguyen, “Corporate Income
Taxes in the 1990s,” Institute on
Taxation and Economic Policy, October
2000.

[15]
Robert S. McIntyre, “Testimony Before the Committee on the
Budget,
U.S. House of
Representatives,”
July 18, 2003.